The Bretton Woods monetary system was created in 1944. Its name is associated with the place where the conference was held, the city of Bretton Wood. Representatives of different countries concluded that it is advisable to make certain adjustments to the existing structure. They also organized the International Monetary Fund (IMF) as the regulatory body responsible for implementing the main provisions of the system.
The international monetary system is a set of relations that have developed as a result of credit, settlement and other operations for the acquisition and sale of goods between representatives of different countries. The introduction of the new system was carried out in order to establish a stable exchange rate, it was planned to ensure the elasticity of its change by reducing the significance of the gold standard.
The Bretton Woods monetary system is characterized by the following basic principles:
- Adherence to the gold exchange standard, that is, the US dollar is accepted as the monetary unit for settlements between states, and the pound and the mark are attached to it.
- The gold parity of the currency is maintained. This means that gold can be obtained in exchange for paper money at the established rate.
- The introduction of a fixed type of exchange rate with a tolerance of one percent.
- Ensuring the sustainability of the course. Methods such as revaluation and devaluation, which are carried out by the state if necessary, are used.
- And of course, the creation of the IMF and the World Bank in order to facilitate the process of interaction between countries and mutual assistance of each other.
It was assumed that the Central Bank would regulate the exchange rate inside the country. In the event of an unfavorable situation, for example, an increase in the exchange rate of the unit of account to an unacceptable limit, he released a large amount of currency to the market, thereby reducing demand for it. And accordingly, the opposite situation was observed with its decrease.
When the Bretton Woods Conference was held, the main idea was to provide the government with the opportunity to adapt independently in rapidly changing courses. This role was previously performed by the gold standard. However, as practice has shown, the effectiveness of this position was short-lived, since already since 1950 there has been an active development of the crisis situation on the world stage.
Thus, when the exchange rate sharply increased, the government chose one of two acceptable options for resolving this situation: either rely on the effectiveness of monetary policy or introduce a new fixed rate. If preference was given to the second method, then there was a need to change financial policies that would prevent the recurrence of an adverse event in the future. As a rule, faced with such a problem, the state did not dare to make a concrete choice in the direction of one or another option. After all, any action could lead to a significant increase in the number of unemployed in the country, for which the government was not ready.
The Bretton Woods currency system was based on a change in the exchange rate of monetary units, while the exchange rate for gold remained at the same level throughout the entire period of the system’s functioning. This indicates the irrational use of the existing advantages, since the gold reserve is considered a reliable support, because its value is not lost over time.
So, the Bretton Woods currency system has been operating in the IMF member countries for about thirty years and has not brought the expected results. This is due to a significant contradiction, which was laid down at the time of its organization. The whole system was built on the foundation of the strength of the American dollar and the stabilization of other currencies in relation to it. However, a stable exchange rate could only be achieved by weakening the base currency, that is, the US dollar. The collapse of the system occurred due to the active development of inflation at the international level.